Bonuses Remain the Top Priority for Raising Compensation

Tess C. Taylor, PHR, SHRM-CP, PayScale Senior BloggerRecently, I wrote about the sluggish state of the US economy and its impact on wages for the third quarter of 2015. But, I neglected to mention one thing. While companies may not be raising salaries as progressively as desired, they are turning to other means to increase the compensation for their most-deserving employees by offering bonuses.

July 28, 2015

Recently, I wrote about the sluggish state of the US economy and its impact on wages for the third quarter of 2015. But, I neglected to mention one thing. While companies may not be raising salaries as progressively as desired, they are turning to other means to increase the compensation for their most-deserving employees by offering bonuses.

Are employee bonuses the new compensation strategy?

A recent Fortune article authored by Anne Fisher highlighted that while companies aren’t handing out raises as much as they did in the past, “they’re just doing it differently.” In other words, employers are more likely to be basing their overall compensation on performance metrics rather than on job titles and other non-essential factors. As part of this mission, bonuses are becoming the catalyst for improving compensation because they can be directly tied to specific tasks that lead to business success.

This is not a bad thing, really when you consider that in the past only sales people and upper management benefited from regular bonuses. Now, it seems the playing field is wide open for employees at multiple levels of any organization to earn one of these coveted perks.

Will more employers offer bonuses?

In the PayScale 2015 Compensation Best Practices Report, it was revealed that nearly 89 percent of all the polled employers plan to give out raises this year, but they are expected to be less than 5 percent merit increases. We did find that 43 percent of employers already have planned larger bonus budgets than last year. As part of a retention strategy, most employers (57 percent) will continue to primarily link pay increases to merit and focus on development and learning opportunities (60 percent) as the means to retain the best and brightest.

Benefits of handing out bonuses

There are several key advantages of using bonuses to strengthen total compensation and retention plans, including:

Ability to control budgets – Bonus programs can be set at a flat rate, a percentage of each employee’s annual salary, or a split of one account across an entire team. They can also be creative. This makes bonuses a more attractive and manageable cost for a company, especially one with limited resources or a small team.

Based on performance instead of expectation – When a company needs to dish out compensation while controlling costs, bonuses offer this because they are based on individual performance vs. expectations. Bonuses are based on the contribution of every member of the team and can be focused on specific performance goals.

Less pressure to increase salaries – Until the economy picks up and companies are comfortable enough to start raising salaries, bonuses are a good alternative in a compensation strategy because they can be handed out when the company wants to and for reasons the company determines.

Bonuses remain a top option for companies that want to base salary increases and incentives on realistic performance based pay systems. Why? Employees understand their contribution to the organization they work for when they earn a bonus rather than get handed a lukewarm raise.

What do you think?

Is your company offering bonuses rather than raises – and if so, how is this affecting performance and retention rates? We want to hear from you, please post your comments below!